Full Judgment Text & Judicial Ruling

1966 P T D 195

1966 P T D 195

[Calcutta (India)]

Before G. K. Mitter and S. A. Masud, JJ

COMMISSIONER OF INCOME‑TAX (CENTRAL)

CALCUTTA

versus

STANDARD VACUUM OIL COMPANY LTD.

Income‑tax Reference No. 37 of 1961, decided on 24th November 1964.

Wealth‑tax‑Business expenditure‑Company carrying on business‑Wealth‑tax payable in respect of assets held for business purposes‑Whether allowable deduction‑Indian Income‑tax Act, 1922, Ss. 10(1) & 10(2)(xv)‑Wealth‑tax Act, 1957, Ss. 3 & 7 [Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income‑tax (1963) 50 I T R 809 and Southern India Tea Estates Co. Ltd. v. Commissioner of Income‑tax (1964) 51 I T R 47 dissented from].

Wealth‑tax payable by a company in respect of assets held by it solely for the purpose of carrying on its business must be considered as an expenditure incurred wholly and exclusively for carrying on the business of the company and is allowable under section 10(2)(xv) in computing its profits.

Though wealth‑tax is payable merely because of ownership of wealth and has to be paid whether or not that wealth is used for a business purpose, a businessman who owns and holds the assets has to own and hold the same for his business and even if the mere holding of it makes him liable to pay a tax the out going must be considered to‑ be necessary for his business when he pursues the same and be considered to be a payment wholly and exclusively incidental to the carrying on of the business.

The Standard Vacuum Oil Company Ltd., which carried on business in India, claimed in its assessment for the year 1959‑60 (the accounting year being calendar year 1958) deduction from its profits, of a sum of Rs. 5,63,706 which represented the provision for wealth‑tax payable by the company for the previous year relevant to the date of valuation for purposes of wealth‑tax, viz., 31st December 1958, on the ground that the liability to pay wealth‑tax was incurred in respect of assets which were held solely for the purpose of carrying on its business, and was, there fore, an expenditure incidental to the business and allowable as a deduction under section 10(1) or section 10(2)(xv) of the Indian Income‑tax Act, 1922. The claim was resisted by the Department, inter alia, on the grounds that the wealth‑tax was not paid to earn the profits but only after the profits were earned; the liability was only a contingent one, and it was not incurred on account‑of carrying on the business but on the ground of owner‑ship of the assets:

Held, that, on the facts and circumstances of the case, having regard to the provisions of the Wealth‑tax Act, 1957, the claim for deduction of wealth‑tax was allowable.

Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income‑tax (1963) 50 I T R 809 and Southern India Tea Estates Co. Ltd. v. Commissioner of Income‑tax (1964) 51 I T R 47 dissented from.

[Cases referred to.]

STATEMENT OF CASE

By this application presented on 23rd December 1960, the Com missioner of Income‑tax (Central), Calcutta, requires the Appellate Tribunal to refer to the High Court a question of law said to arise out of the order of the Tribunal dated 28th October 1960, in I. T. A. No. 11636 of 1959‑60. Inasmuch as, in .our opinion; a question of law does arise, we hereby draw up an agreed statement of the case and refer it to the High Court under section 66 (L) of the Indian Income‑tax Act.

2. The assessee, the Standard Vacuum Oil Company, filed a return of total income of Rs. 3,49,13,506 for the assessment year 1959‑60, the relevant previous accounting year being the calendar year 1958. In arriving at the above total income the assessee had claimed a sum of Rs. 5,63,706 as a deduction in the assessment under appeal. This sum represented the provision for wealth‑tax payable by the assessee for the previous year relevant to the date of valuation, 31st December 1958. It was urged before the Income‑tax Officer on behalf of the assessee that in order to carry on the business of the company, it had to possess wealth in the form of various assets and, there fore, the tax levied on such wealth was incidental to the business and hence the tax payable should be allowed as a deduction.

3. The Income‑tax Officer wrote as follows:

"Wealth‑tax is no doubt a charge on all assets, including business assets as well as non‑business assets. Even if a person is not carrying on any business wealth‑tax is payable on the value of the net assets owned by him. Wealth‑tax can in no sense be said to be incurred for business purposes; hence the claim will be disallowed."

4. On appeal the Appellate Assistant Commissioner held that the provision for wealth‑tax could not in any circumstances be held to be an expenditure wholly and exclusively laid out for business and that the deduction claimed was not allowable.

5. The assessee appealed to the Appellate Tribunal and contended that the business was carried on in India, that for carrying on that business there were assets and that the aggregate of the assets over the liabilities was brought to wealth‑tax but as the assets were held only for the purpose of the business, any tax levied upon the holding of those assets had to be paid only during the conduct of the business and so the assessee was entitled to claim the expenses under section 10 (l) if not under section 10(2)(xv). Reference was made to sections 3 and 7 of the Wealth. tax Act for the proposition that the two sections should be taken into account, one being the charging section and the other refer ring to the global valuation.

6. The Departmental Representative contended that the payment of wealth‑tax was made after the profits had been made and, therefore, it was not an expense wholly and. exclusively incurred for the purpose of the business, that the ascertainment of liability of wealth‑tax was on the corresponding valuation date in each year, which was the last working day of the accounting year and, therefore, it was useless to say that the expenses had been incurred in the business out of the profits that was earned in that year. He emphasized that it was not enough if the expenditure incurred was in some way connected with the business but it must be such expense as was really incidental to the business itself and for earning the profit which was the subject matter of taxation.

7. The Tribunal pointed out that there was conflict of opinion upon this matter and that there could be no objection if the assessee would have this expense allowed in the year of actual payment. For reasons stated in paragraph 6 of their order, which is Annexure "A" hereto forming part of the case, the Tribunal held that there was no merit in the objection of the Department that a contingent liability could not be a justifiable claim for deduction and allowed the tax that was actually paid in the year of account.

8. On these facts, the question of law that arises is as follows:

"Whether, on the facts and in the circumstances of the case, having regard to the provisions of the Wealth‑tax Act of 1957, the allowance of wealth‑tax liabilities was correct?"

B. L. Pal and S. M. Mukherjee for the Commissioner.

D. Pal for the Assessee.

JUDGMENT

MITTER, J.‑The question in this case is whether wealth‑tax paid by a company on assets held by it for the purpose of its business is allowable as a deduction under section 10(1) or section 10(2)(xv) of the Indian Income‑tax Act, 1922.

The contention of the assessee before the Income‑tax Officer was that in order to carry' on its business the company had to possess wealth in the form of various assets and therefore the payment of tax levied on such wealth was incidental to the business and allowable as a deduction in computing its profits. The Income‑tax Officer held that although wealth‑tax was a charge on the assets of the company including business as well as non- business assets, a person owning assets has to pay tax not because he carries on business but because of his ownership of the assets and hence wealth‑tax levied would not be said to be expended wholly and exclusively for business purposes. This was upheld in appeal by the Appellate Assistant Commissioner. The Tribunal however came to a different conclusion. According to the Tribunal "the assets were held by the assessee for the purpose of its business and no other". It was urged that if the assessee had not paid the tax the revenue authorities might have taken measures for bringing the assets to sale for recovery of the tax: from this point of view payment made to avert that contingency was expenditure incidental to the carrying on of the business. It was contended by the revenue that the determi nation of the wealth‑tax was arrived at after the profits had been made and therefore the payment of the wealth‑tax was not an expense wholly and exclusively incurred for the purpose of the business. According to the Tribunal it did not matter that the computation had to be made as at the end of the year. Not being satisfied with this the revenue authorities required the Tribunal to refer to this Court the question of; law which was couched in the following words:

"Whether, on the facts and in the circumstances of the case, having regard to the provisions of the Wealth‑tax Act of 1957, the allowance of wealth‑tax liability was correct?"

Under section 3 of the Wealth‑tax Act of 1957 "there shall be charged for every financial year commencing on and from the ‑1st day of April 1957, a tax in respect of the net wealth on the corresponding valuation date of every individual Hindu undivided family and company at the rate or rates specified in the Schedule." It will be noticed at once that the tax is charged for every financial year; the net wealth has to be determined in terms of section 2(m) which broadly speaking means the aggregate value of all the assets of the assessee on the valuation date less the debts owed by him. Under section 2(q) "valuation date" in relation to any year for which an assessment is to be made means the last day of the previous year as defined in the Income‑tax Act if an assessment were to be made under that Act for that year. Under section 7(l) the value of any assets is to be estimated at the price which it would fetch if sold in the open market. Under section 7(2)(a) where an assessee is carrying on a business for which accounts are maintained ‑ by him regularly, the Wealth -tax Officer may, instead of determining separately the value of each asset in such business, determine the net value of the assets of the business as a whole having regard to the balance of such business as on the valuation date. This is only a rough and ready method which can be adopted by the Wealth‑tax Officer so as to avoid the valuation of each item of asset separately. The Schedule to the Act shows that a company which has incurred a net loss in any year computed in the manner provided is not to pay any wealth‑tax if it has not declared any dividend on its equity capital in respect of that year. Further, if the profits of the company in respect of any year before the deduction of certain allowances fall short of the amount of wealth‑tax payable by it in respect of the relevant assessment year, the tax payable by the company is to be limited to the amount of such profits if the company has not declared any dividend on the equity capital in respect of that year.

Section 10(1) of the Income‑tax Act, 1922, provides that tax is to be payable by an assessee carrying on business in respect of the profits or gains of the said business. Section 10(2) of the Act enumerated various allowances which have to be taken into account for the computation of the profits or gains. The specifi cation is however not exhaustive and clause (xv) of section 10(2) provides for the deduction of any expenditure not being an allowance of the nature described in clauses (i) to (xiv) and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business. There is no question here as to whether the expenditure is of a capital nature or whether it is personal to the assessee. The only question is whether the amount was expended wholly and exclusively for the purpose of the assessee's business. The expression "for the purpose of such business" has a very wide ambit. It must include anything which will further the cause of the business as also anything which is so linked with the business as to go hand in hand with it or be an unavoidable outgoing by its very nature. Thus an expenditure incurred by a businessman with the idea of increasing his profits, a disbursement made with the object of meeting a threat to it, a payment which is unavoidable by anybody carrying on a particular business must all be included within the category of an expenditure for the purpose of the business. To illustrate adver tisement expenses, expenses of litigation to meet a threat by another trader attempting to pass off his goods as and for that of the assessee, a licence fee which a businessman must pay in order to enable him to carry on his business must be deductible for the purpose of computation of the profits of his business. It is difficult to conceive of any business which can be carried on without assets of some kind or other. If the assets are held exclu sively for the purpose of the business, an imposition on the owner ship of the assets must in my opinion be a necessary concomitant of the business. The assessee in this case as is well known carries on business as dealers and traders in petrol and petroleum products. Such a business cannot be carried on unless stocks of these commodities are held by the trader. He must also have depots where these commodities are stored, shops where they are sold, motor trucks and lorries for their transport from the depots to the shops, etc. The trader must also hold some business pre mises. This may be on freehold land of his own or held by him ‑on rental. If he buys a plot of land and raises structures on it for the purpose of using as a depot for storing his stock‑in trade, I can see no reason why such land and structures cannot be held to be assets necessary for the purpose of his business. But if he owns a multi‑storeyed house, in one portion of which he carries on his business and letting out the rest, it would be impossible to say that the entire property is an asset held by him for the purpose of his business. In this case the finding of the Tribunal is that the assets are held for the purpose of the assessee's business and no other. An imposition like the wealth tax which the assessee has to bear if it wants to carry on business must in my opinion be considered to be an expenditure incurred wholly and exclusively for his business. If he does not hold the assets for any other purpose the imposition must be held to be a necessary expenditure which 'he must incur for the purpose of his business and be covered by the wording of section 10(2)(xv) of the Income‑tax Act.

It was, however, contended on behalf of the revenue that the imposition had to be met not because of the assessee's carrying on a business but by reason of its mere ownership of the assets.

It was argued that the capacity in which the assessee paid the tax was that of an owner and not a trader. The argument was sought to be fortified by reference to some decisions of the Supreme Court on the applicability of clause (xv) of section 10(2) to diverse circumstances. Reliance was further placed on two decisions, one of the Madras High Court and the other of the Kerala High Court where the contention of the revenue as to the inadmissibility of payment of wealth‑tax by a company on its business assets has been upheld.

The first decision to which reference must be made is that of the Supreme Court in Badridas Daga v. Commissioner of Income tax ((1958) 341 T R 10). There the question was whether a sum of money em bezzled by an employee of the assessee was allowable as a deduction either under section 10(I) or under section 10(2)(xv). It was laid down that profits and gains liable to be taxed under section 10(1) were such as would be understood to be profits according to ordinary commercial principles and the admissibility of an outgoing under section 10(2)(xv) would depend on whether having regard to accepted commercial practice and trading principles the same could be said to arise out of the carrying on of the business and to be incidental to it. It was observed: "If employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it." The Court further said that ". . . . . the loss for which a deduction could be made under section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business". This was illus trated by the case of a loss occurring to a money‑lender by theft of his funds overnight. Such a loss was described as one which may fall to any owner of funds whether carrying on a money lending business or not and as such not incidental to the business. According to the Supreme Court loss by embezzlement was incidental to the assessee's carrying on his business and as such allowable under section 10(1) of the Income‑tax Act.

The question of relevancy of the capacity of the assessee in the matter of payment came up for consideration before the Supreme Court in Commissioner of Income‑tax v. Abdullabhai Abdulkadar ((1961) 411 T R 545). In this case the assessee carried on business as commission agent and was treated as an agent of certain non‑resident principals of Port Sudan. Goods were supplied from India by the assessee to the non‑resident principals who on their part consigned cotton to the assessee and other merchants for sale in India. The assessee was treated as the agent of the non‑resident principal under section 43 of the Income‑tax Act for the purpose of income‑tax and excess profits tax. It. had to pay a large sum of money under the provisions of section 42(1) of the Income‑tax Act as such agent. Under this provision all income, profits or gains accruing or arising from any business connection in the taxable territory was to be deemed to be income accruing or arising within the taxable territories and where the person entitled to the income, profits or gains was not resident in the taxable territories, he was to be chargeable to income-tax either in his own name or in the name of his agent and in the latter case such agent was to be deemed to be, for all the purposes of the Act, the assessee in respect of such tax. The assessee paid the amount which was payable by the non‑resident principal and claimed to have it deducted as a loss to be set off against his profits. Relying on the provision of section 42(2) it was argued that the assessee's business was foreign trade which was inter connected with the business of the non‑resident principal and therefore the nature of the business was such as to attract the im position of liability on the respondent under section 42(2) and the loss incurred must be taken to be incidental to and arising out of the business of the assessee. The Court held that the liability was imposed on the assessee because it was treated as an agent within the meaning of section 42 (1) of the Act and because of the deeming provisions of subsection (2) of section 42. According to the Court it did not spring directly from the carrying on of the assessee's business and was not inci dental to it but the liability arose because of the business of another person.

In my opinion, this decision does not help the revenue. Clearly the business which excited liability to income‑tax was the business of the non‑resident principal as it was he who made the profit and it was only under the deeming provision of section 42(2) that the liability of the principal had to be met by the agent who though connected with the business of the principal did not make the profits; the profits belonged to someone else and it was the misfortune of the assessee that it did not deduct necessary funds where with to meet the demands of income‑tax.

Before dealing with the latest case of the Supreme Court cited, it is necessary to refer to certain English decisions noted in the judgment of the Supreme Court. In Strong & Co. of Romsey Ltd. v. Woodifield ((1906) A C 448), a brewery company which owned an inn claimed to deduct from its profit the damages which it had to pay to a customer sleeping in the inn by the falling of a chimney upon him; the House of Lords held that the damages were not deductible as the assessee had to pay tax on the balance of the profits or gains of a trade and a deduction could not be allowed on account of loss not connected with or arising out of such trade and no sum could be deducted unless it was money wholly and exclusively laid out and expended for the purpose of the trade. Loreburn L. C. observed: "The nature of the trade is to be considered no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise. In the present case, I think that the loss sustained by the appellants was not really incidental to their trade as inn keepers, and fell upon them in their character not of traders, but of householders." Lord Davey said: "It. has been argued that the deduction claimed was a loss connected with or arising out of the appellants' trade within rule 3 applying to Case I only. Case I relates to trades, manufactures, adventures or concerns in the nature of trade, and I think that the word loss in rule 3 means what is usually known as a loss in trading or in specula tion . . . I think that the payment of these damages was not money expended `for the purpose of the trade.' These words are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, &c. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or, is connected with, the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits."

In Smith v. Lion Brewery Co. Ltd. ((1909) 2 K B 912) the Court of Appeal by a majority upset the judgment of Channel, J. holding that the sum which the assessees were compelled to pay for the compen sation charge was a payment necessary to enable them to earn profits as a brewery company and might properly be deducted from the profits with a view to ascertaining the balance on which income tax had to be paid. The business of the assessee was that of brewers and sellers of beer. The assessee acquired a number of tied houses in order to enable it to sell its beer in larger quantities and to greater advantage. The Licensing Act of 1904 compelled a licence‑holder to pay the levy. That levy formed a fund out of which compensation was to be made to those whose licences were discontinued by no fault of their own but in order to carry out the statutory policy of reducing the number of licensed houses and. also to those who owned the houses themselves. They were entitled to share in the compensation and were also bound to contribute to the fund. The licence‑holder could deduct a part of it from the rent he paid and his landlord might in turn, deduct from the rent he had to pay, and so on, in order that each person interested in the house might contribute to the fund in proportion to the extent of his interest in accordance with the tables set forth in Schedules I and 11 to the Act. The question before the Court was whether the assessee could deduct the amount which it was obliged to pay as owner of tied houses in respect of the compensation levy authorised by the Act of 1904. Accord ing to the judgment of Farwell, L. J. who took the same view as Cozens‑Hardy M. R. : "The compensation levy under the Licensing Act, a portion of which it is sought to deduct, is imposed and made payable as part of the excise. It is paid in the first instance by the tenant, but the landlord is bound to allow the deduction of a proportionate part, according to the length of the term, from the rent. It is, therefore, in effect a statutory imposition on landlord and tenant in proportions varying according to their respective interests and necessarily payable as a term of the use of licensed premises . . . . . It is a payment…

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